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Student loan interest rates vary between federal student loans and private student loans. The federal government has halted payments and waived interest through the end of 2020 for current federal borrowers in repayment due to the coronavirus pandemic. If you are in school, need to borrow private student loans, or are considering refinancing, your interest rates will be different.
What are student loan interest rates?
Interest is what you pay back to your lender for taking out a loan. Your lender may be a bank, credit union or another institution, such as the federal government.
Interest rates are not the same for all student loans. They differ between a few types of federal student loans and by private student lenders.
Current Student Loan Interest Rates
Although most student loans are granted at the federal level, some students have to borrow more or use other resources. Private student loans are a good option if you’ve exhausted all of your federal funding through the Free Application for Federal Student Aid, or FAFSA.
When you complete the FAFSA, you are approved for federal scholarships, grants, work-study opportunities, and student loans. If you don’t complete the FAFSA or your expected family contribution is more than you can afford, you may need to apply for private student loans.
These types of loans come from banks, credit unions, or online lenders. They tend to have higher interest rates than federal student loans. Additionally, most private student loans do not offer the same flexible repayment plans offered by federal lenders, such as income-based repayment plans.
How student loan interest rates are set
Federal student loans and private student loans set their interest rates differently.
Federal student loans
At the federal level, student loan interest rates are set by Congress. They are always fixed, not variable, and will not change over the term of the loan unless you consolidate through a direct consolidation loan or your loans go private through refinancing.
If you apply for subsidized and unsubsidized loans, your interest rate does not take into account your credit score. However, if you require a PLUS loan, you will be subject to a credit check. If you have scars on your credit, such as defaulted loans, repossession, or bankruptcy, you may not be approved for a PLUS loan.
This is also important for parents taking out PLUS loans on behalf of their dependent child attending college. If you don’t have a strong enough credit score to qualify, you may not be able to get PLUS loans for your child.
Private student loans
If you need to take out private student loans, interest rates are based on your credit score and history. If you are a student with very little or no credit, you may have difficulty borrowing private student loans and may need a co-signer.
If you’re a co-signer of a student attending college, your credit score can be a determining factor not only in qualifying for a student loan, but also in getting the lowest interest rate available. The higher your credit score, the lower your interest rate. The lower your score, the higher your interest rate. Along with that, poor or fair credit could mean you can’t borrow as much as you need to pay for your education.
How to Apply for a Student Loan
If you need money to pay for your education, try to get as much free money as possible, that is, money that you don’t have to pay back. This includes scholarships, grants, and any money you or your family have saved for school. Once these resources are exhausted, you can apply for federal and private loans.
1. Complete the FAFSA
Start with federal student loans. These loans are the most beneficial because they tend to have the lowest interest rates, generally don’t base your interest rate on your credit score, and offer many repayment options. If it’s time to pay off your student loans and you need a new plan, you’re spoiled for choice, from the standard repayment plan to the progressive repayment plan and several income-contingent repayment plans (IDR ).
To apply for a student loan, complete the FAFSA. And, if you want to continue receiving money, you’ll need to complete a FAFSA every year you’re enrolled at least half-time. Since some student aid is awarded on a first-come, first-served basis, the earlier you apply, the more help you may receive in the form of scholarships and grants. If you are a student dependent, your parents will need to have the latest tax returns handy, as well as W-2 forms, pay stubs, and asset information.
2. Look for private student loans
If you don’t have enough money to pay for your education through free money and federal student loans, you may need to apply for private student loans. You can compare many different lenders before you apply to see which ones offer the lowest interest rate, offer a grace period like federal student loans, and offer help in case you can’t make payments.
Also find out which lenders offer pre-qualification options that allow you to see your chances of qualifying without applying for a loan and triggering a rigorous credit check. Serious inquiries cause your credit score to drop temporarily and stay on your credit report, so you’ll want to limit loan requests until needed. If you apply for a private student loan and are denied, you will need to apply elsewhere and you will still have a thorough investigation of your credit report. Apply with caution.
3. Apply for private loans
There is no universal application for a private student loan; each lender has its own application process. You will need to provide personal and financial information. If you don’t have a strong enough credit history to qualify for a private student loan, find a co-signer who does.
A co-signer can help you get a student loan if you don’t have enough credit to qualify on your own. But when it comes time to pay off your student loans, one missed payment can hurt both of you. Not only will your credit score go down, but so will your co-signer’s score. Keep this in mind when exploring private student loan options.
Find the cheapest student loans
The cheapest student loans are federal student loans. They have the lowest interest rates, offer a six-month grace period, and have many different repayment options when it comes time to pay them back.
Finding the cheapest student loans through private options can seem daunting, as you will have to compare many different lenders. Look at what you need to qualify for the cheapest loans available, including your credit score and the amount you’re borrowing. Assess which ones have the least fees, if any, such as set-up, late payment, or prepayment fees. The less fees a lender charges, the less you will pay over the life of the loan.
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